Real Estate Turning Down

Posted Sep 9, 2016 by Martin Armstrong

I have explained that watch the core regions in real estate and you will forecast the rest. Real estate booms and busts always begin in the core regions. As that property rises sharply, people begin to buy what is cheaper the next two over. This is the process of the economic wave in real estate which is very much like putting a drop of water from above into a standing pool of water. The waves will spread from the epic center outward and gradually diminish.

In the United States, the three main regions for this rally in the high-end market has been New York, Miami, and Los Angles. All three markets have begun the decline and we are now watching this slowly spreading outward. Chicago real estate has begun to turn and so has the Vancouver market as well as in London, no less Paris as well as Hong Kong. The outer regions even in Britain never exceeded the 2007 high as was the case for the average market in the United States. In fact, home ownership has fallen to a 51.6 year low from the 1965 high.

Some of the outlying regions are still ok, but that will gradually change. Much of this decline is now the result of changes in taxation. Previously, London and Paris property markets were supported by the fact that foreigners did not pay tax on profits. We warned that would change, and did it! Because of the mad rush of foeign investors, politicians went after them with a vengeance. In the United States, if a foreign citizen now sells US property, 15% of the gross is held by the US government for potential taxes. In London, Osbourne changed the tax on property and the first month the crash began by 11.5%. Australia imposed laws against foreign ownership of property making it even criminal. In the States, IRS targeting NYC and Miami in their hunt for moneydemanding that title companies pierce the corporate veil on who is behind an LLC buying property. Why? A foreigner would set up an LLC in the States to avoid the 15% withholding upon a sale.

The high-end real estate market boomed and made its high with the rebound in 2015.75. This is an average cycle of real estate market as a whole and it will not match every market specifically since it depends where it is relative to the core represented here. The 2007 peak seems to be correct around the world in the general average home market. The high-end made new highs as capital began trying to just park off the grid and out of banks.

The whole reason Roosevelt created the 30 year mortgage was to try to get people to buy on credit. Property was being auctioned off in the 1930s and it was for cash only. Prices for farmland fell to pennies on the dollar for only cash buyers could bid. The 1955 turning point was really everything. The Case-Shiller index, which suddenly rose from the Great Depression, does not take into account the dollar devaluation that sparked that rise as it did in equities. That was virtually a 60% devaluation of the dollar that moved it from $20 to $35 on a gold standard by FDR. Was that rise “real” or currency related? Sorry, the real rise begins post-war from 1955. That was the real housing boom.

The Case-Shiller does not accurately reflect the changes in currency. One must look at everything in terms of international value before they can see if they really made money or just broke even because the currency declined. From a value perspective, the 1929 high was more than three times that of the 1890s. So the high of the 1890s was purely a rise due to the collapse in the dollar; it was the hallmark of the panic of 1893 and was best expressed in Grover Cleveland’s speech before Congress.

So now we face the overall decline in the core markets and this will spread to the peripheral. However, at the end of day, we need a place to live. If you are talking about where you live and it is not all your wealth, then real estate will help make the transition when it comes time for a swap to a new currency down the road.